Thursday, September 13, 2007

Oil at a (nominal) record of $80 a barrel? Shocking! So say many OPEC members and ExxonMobil chairman Rex Tillerson, who are most puzzled that prices stay so high given that the market is well supplied with crude. Must be those pesky financial speculators!

This, of course, is nonsense (and predictable self-interested nonsense at that). While it's possible that investors may affect the price of oil in the short-run, prices have been high for many years, which surely means that the fundamentals are really in command.

And speaking of those fundamentals, let's see what the International Energy Agency expected for all 2007 back in January. Basically, demand was forecast at 85.77 millon barrels per day, while non-OPEC supply was expected to be 50.6 million barrels per day. In the most recent forecast, demand is now set at 85.9 mbpd, while non-OPEC supply is estimated at 50 mbpd.

In other words, demand has been higher than forecast, while supply has come up short (OPEC output has been broadly flat). That sounds like an Econ 101 recipe for higher prices to me.